November 21, 2018 11:22 PM
“Stable, but built on tears,” says one redditor.
Despite steep losses by Ether holders amid the recent price drop, many in the Ethereum community are finding cause for celebration: MakerDAO's Ether-backed stablecoin, Dai, is maintaining its peg to the dollar.
It was recently reported[1] that (slightly less than) 1 percent of all Ether was locked in MakerDAO CDPs (Dai-issuing EDCCs). Since Ether's crash this past week, the amount of Ether held in CDPs has risen[2] by around 29 percent.
If you understand how the MakerDAO system functions, the explanation is fairly straightforward. At its most basic, this is how Dai works[3]: You put some Ether into a CDP. The CDP then holds your ETH as collateral and issues you a loan/line of credit in Dai. Because something needs to be held as collateral against the loan/line of credit, and the price of ETH fluctuates, your collateral must always be at least 150 percent of your loan. If the value of your collateral drops below 150 percent of the value of your loan, then your collateral is liquidated and sold to the highest bidder, and you're charged a 13 percent liquidation fee (calculated based on your debt).
This being the case, those who wish to take out a loan in Dai, or who already have one, have an incentive to over-collateralize to prevent losses, leading to more Ether being locked in CDPs than usual.
This is good news for Maker, but it's not all bright eyes and sunflowers. While the anti-fragility of MakerDAO's stablecoin in the face of Ether's sharp decline is a cause for optimism, it's also true that a lot
